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Mills Corporation acquired as a long-term investment $260 million of 7% bonds, dated July 1, on...

Mills Corporation acquired as a long-term investment $260 million of 7% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $320 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $300 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2021, balance sheet?
4. Suppose Moody's bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2022, for $330 million. Prepare the journal entries required on the date of sale.

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Answer #1

Answer:

Sl.
No.		 Journal Entry Debit
(Million)		 Credit
(Million)
1 Investment in Bonds
(Mills Corporation acquired as a long-term investment $260 million of 7% bonds)		 $260
Premium on Investment in Bonds
(Mills paid $320 million for the bonds. Hence, $60 million has been paid as premium)		 $60
Cash $320
2 Cash
($260 million X 7% / 2)		 $9.10
Premium on Investment in Bonds $1.10
Interest Revenue
($320 million X 5% / 2)		 $8
3 Investment in bonds $260
Premium on Investment in Bonds $60
Premium on investment in Bonds amortized -$1.10
Carrying Value $318.90
4 Cash $330
Premium on Investment in Bonds $60
Premium on investment in Bonds amortized -$1.10
Investment in bonds $260
Gain due to investment sale $11.10
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